Frontier Markets: Living In Their Own World (w/ Larry Speidell) | Discoveries | Real Vision™

TL;DR

Investing in frontier countries can reduce risk in a portfolio due to their low volatility and independent market movements.

Transcript

The real message here, about low volatility, is one that has to do with the low correlation of the stock markets across these countries. And when you look at low volatility of the major categories of world indexes, what you find is that the U.S. has a 36 month standard deviation of market movements of a little over 10%. That developed countries out... Read More

Key Insights

• 😘 Frontier countries have low volatility in their stock markets due to their low correlation with each other.
• ✳️ Including frontier countries in a portfolio can reduce overall risk by diversifying across independent market movements.
• 😵 Developed countries have a higher cross-country correlation, making their market movements more influenced by global events.
• 🚶 The concept of "walking around GDP" challenges traditional indicators of poverty in frontier countries by demonstrating economic activity and potential for investment.
• 😘 The low volatility and independent movements of frontier countries make them attractive for risk reduction and portfolio diversification.
• 😘 Individual frontier countries can be volatile, but their lack of correlation with each other contributes to overall low volatility.
• 🚨 Frontier countries offer unique investment opportunities as they tend to move independently from developed and emerging markets.

Questions & Answers

Q: What is the relationship between low volatility and the low correlation of stock markets in frontier countries?

The low correlation between frontier countries' stock markets means that they move independently from each other, resulting in low volatility. Investors in one frontier country are not influenced by the actions of investors in another country.

Q: How does including frontier countries in a portfolio benefit risk reduction?

Frontier countries' low volatility and independent movements reduce the overall standard deviation of a portfolio, offering risk diversification. By adding frontier countries to a portfolio, investors can potentially achieve better risk-adjusted returns.

Q: Which category of countries has the highest cross-country correlation?

Developed countries have the highest cross-country correlation, with an average of nearly 0.6. This means that they are more likely to move in the same direction as the US market in response to events like Federal Reserve actions or government shutdowns.

Q: What is the concept of "walking around GDP"?

The "walking around GDP" refers to the observation of economic activity and vibrancy in frontier countries that may not be reflected in traditional statistical indicators. It highlights that despite poverty levels, there are signs of growth and potential for investment.

Summary & Key Takeaways

• The low volatility of frontier countries' stock markets is due to their low correlation with each other, which allows for risk reduction in a portfolio.

• While individual frontier countries may be volatile, the average cross-country correlation is low, showing that they move independently from each other and from developed and emerging markets.

• The "walking around GDP" concept suggests that despite statistical indicators of poverty, frontier countries can exhibit signs of economic activity and potential for growth.